Adam Smith talked about the invisible hand and how profit seeking firms would provide what the public wanted. But what about trying to make the world a better place? CVS lost $2 billion by not selling cigarettes. Walgreens says it isn’t a retailer’s job to keep shoppers from their vices.

"But the annual revenue of every society is always precisely equal to the
exchangeable value of the whole annual produce of its industry, or
rather is precisely the same thing with that exchangeable value. As
every individual, therefore, endeavours as much as he can both to employ
his capital in the support of domestic industry, and so to direct that
industry that its produce may be of the greatest value; every individual
necessarily labours to render the annual revenue of the society as
great as he can. He generally, indeed, neither intends to promote the
public interest, nor knows how much he is promoting it. By preferring
the support of domestic to that of foreign industry, he intends only his
own security; and by directing that industry in such a manner as its
produce may be of the greatest value, he intends only his own gain, and
he is in this, as in many other cases, led by an invisible hand to
promote an end which was no part of his intention. Nor is it always the
worse for the society that it was no part of it. By pursuing his own
interest he frequently promotes that of the society more effectually
than when he really intends to promote it. I have never known much good
done by those who affected to trade for the public good. It is an
affectation, indeed, not very common among merchants, and very few words
need be employed in dissuading them from it."

Now excerpts from the WSJ article:

"Three years after eliminating tobacco products from its shelves
and adding “health” to its name, the company is taking more steps and
moving most junk food away from the storefront, banning sales of
low-protection sunscreens and eliminating foods containing artificial
trans-fats.

The changes are part of CVS’s effort to stand apart from rivals by focusing on health-care goods and services"

"Walgreens Boots Alliance Inc.
says it isn’t a retailer’s job to keep shoppers from their vices
and that consumers should be able to make unhealthy choices if they want
to. But like CVS, it is trying to boost sales by appealing to a more
health-conscious shopper.

Walgreens sells cigarettes but offers
smoking-cessation help in the form of specially trained pharmacists and
quitting aids. It is keeping candy up front but has added fresh fruit
and vegetables in other parts of the store. It also has a loyalty
program that rewards shoppers with points for exercise and health
monitoring that can be used on purchases.

“How do you still give customers the choice and not tell them what is
good for them, but help them make healthier choices?” Walgreens Boots
co-operating chief
Alex Gourlay
said in an interview. “There’s a level of making things available
so it’s the customer’s choice, and there’s a level of incentivizing the
customer.”"

"CVS’s latest moves are subtle. It will still sell candy bars at the
front register but is moving the main snack aisle, with its bags of
candies, sweets, chips and other munchies, to the middle of the store.
Candy accounts for roughly 5% of overall drugstore revenue, according to
Nielsen."

"“We make a distinction between indulgent products and damaging products,” said
Judy Sansone,
CVS’s chief merchant. “We are giving more healthy-choice options and making sure the customer can find them.”

The modifications aren’t expected to dent sales as did the tobacco ban,
which the company said cost it $2 billion in annual revenue."

Thursday, June 29, 2017

That is good news. But the article does mention a shortage of skilled workers. This is an example of structural unemployment. I did a post on this a few weeks ago. See Structural Unemployment In The News. One of the things I mentioned there is "The percentage of 25-54 year-olds employed is 78.4% for May. It was 78.6% in April. It is still below the 79.7% in December 2007 when the recession started." So the low unemployment rate might not be the good news it sometimes is.

Excerpts from the Bloomberg article:

"Widely disdained for its relatively weak growth and pay gains, the
expansion is about to complete its eighth year — and it’s headed to
become the longest on record, according to a Bloomberg survey of
economists. Respondents put a 60 percent probability, based on the
median estimate, on the growth streak running through at least July 2019
and thereby reaching 121 months, topping the 10 years of gains during
the 1990s."

"“The U.S. economy looks pretty healthy right now when you think in
terms of sectors that could blow up,” said Stephen Stanley, chief
economist at New York-based Amherst Pierpont Securities LLC. Having
avoided any “violent bounceback” during the recovery, “most sectors seem
to have room to run,” signaling continued moderate growth, he said.

A strong job market, subdued inflation, low borrowing costs and
healthier finances will be a tailwind for consumer spending while
business investment, a laggard so far, is expected to join the drivers
of growth. Even trade may become less of a drag."

"Current demand is getting help from the labor market. About 15 million
jobs have been added since the recession ended in June 2009, and
unemployment is at a 16-year low. Payroll gains have probably peaked,
though they’re exceeding what’s needed to keep the jobless rate steady
as people enter the workforce. A sustained acceleration in wages is
still missing even with the U.S. near maximum sustainable employment."

"shortages of skilled workers and available lots are weighing on residential [housing]starts, which fell in May."

[Economists in a survey think] "the probability of a recession in the next 12 months was only around 20 percent."

"Companies chose to hire rather than invest in equipment, which helps explain why productivity is barely budging."

It seems like part of the problem is that social customs are changing. Women are earning more money, so they have more resources. But on top of that, it also seems like it is not always clear what the "date" is or who is responsible for paying. Is it the person who asked the other person out? What if you just say "I am going to a movie tomorrow, would you like to come with?"

Maybe this is a problem of asymmetric information. Each side has different information (they perceive what is going on differently, for example). Like in used car markets. Sellers know more about the cars than buyers, so those markets don't work optimally. Maybe something like that is going on here. Of course, both sides could talk about the "date" or "get together" ahead of time and hammer out all the details. But maybe that takes all the fun or romance out of things. It could end up like Sheldon on "Big Bang Theory" with his extensive "relationship agreements" and "roommate agreements."

Excerpts from the article:

"Love in the time of Tinder is upending an age-old tradition between
men and women: that moment when the bill arrives and the woman feints
for her wallet—but expects the guy will insist on paying.

The popularity of the dating app and others like it means single people are going on more first dates
than ever. Many women say they have stopped doing the reach because
they are not only more likely to end up splitting the bill, but also
more liable to cover all of it. Now when the check arrives, both people
often brace themselves for a gunfighter’s staredown."

"Alex Paull, 19, said she recently went on a date with a man she met
on Tinder and chose not to reach for the check since he had picked the
place and initiated the date.

After the man took her home, he
sent her a $20 invoice via the mobile-payment app Venmo for her portion
of the meal, she said. The West Virginia University student said she
blocked him on Venmo and didn’t pay the bill."

"The rules aren’t complicated, according to etiquette experts. “If you
invite, you pay,” said Diane Gottsman, author of “Modern Etiquette for a
Better Life.” “But the reality is that the other person may not know
the rules or realize it’s a date.”"

"Thanks to the growing number of online dating services, the economic dynamics of playing the field have changed. According to analysis conducted by
Deutsche Bank,
paying for two people in New York or San Francisco to go to a
movie and have a meal, plus a few beers and taxi rides, comes to about
$130. Three of those a week can cost more than $20,000 a year."

"“Not reaching when reaching is expected is a kind of reverse power
play,” said Chase Amante, founder of Girls Chase, a website aimed at
providing dating advice to men. “Rather than the man asserting power by
paying, the woman asserts power by forcing the man to pay.”

"A
woman who refuses to reach, however, could come off as a “gold digger,”
he said. “There’s a certain subset of the population looking for free
meals.”"

The practice of a man paying on a heterosexual date has proved more
resistant to change than other gendered norms, said David Frederick, a
psychology professor at Chapman University. In a 17,600-person study he
published with colleagues in 2015, 39% of the women surveyed said they
hoped the man would decline an offer to help pay the bill."

Economists assume that people act on their self interest. So why do we sometimes see people act altruistically? It might have something to do with helping others who share your genes, like family members. This helps your character traits make it to the next generation. That also assumes that what genes want to do is replicate and spread themselves. Here is an excerpt from the article:

"Altruism has always been a bit of a problem. Every altruist has their own motives, of course—some are emotional, responding to fellow humans in desperate straits, while others are more rational, thinking about the kind of society they’d like to live in and acting accordingly. Does that imply a level of self-interest? Even if it did, it shouldn’t undo the goodness of altruism, and yet people can be deeply suspicious of those who apparently willingly put others’ interests before their own. Selfless acts often attract accusations of hidden selfishness, suggesting they’re not really altruistic at all.

This wasn’t the problem for Darwinism. After all, humans have culture and religion and moral codes to live by—maybe our altruism was more to do with that than biology. Unfortunately, altruism was not only a human trait—it was everywhere. There were birds that nurtured other pairs’ fledglings, vampire bats that regurgitated blood for those who’d failed to feed in the night, monkeys that put themselves in danger by raising the alarm when a predator approached the rest of their troop.

It was altruistic ants that posed a particular problem for Charles Darwin. Natural selection is often described as “survival of the fittest,” where fitness means how successful an individual is at reproducing. If one individual has a trait that gives them a fitness advantage, they will tend to have more offspring than the others; because the advantage is likely to be passed on to their offspring, that trait will then spread through the population. A fundamental part of this idea is that individuals are competing for the resources they need to reproduce, and fitness includes anything that helps an individual reproduce more than the competition.

But as Darwin observed, ants and other social insects are not in competition. They are cooperative, to the extent that worker ants are sterile and so have literally zero fitness. They ought to be extinct, yet there they are in every generation sacrificing their own reproductive ambitions to serve the fertile queen and her drones. Darwin suggested that competition between groups of ants—queen, drones, and workers together—might be driving natural selection in this case. What was good for a nest competing against other nests would then outweigh what was good for any individual ant.

Group selection, as this idea was known, was not a very good solution, though. It didn’t explain how the cooperative behavior evolved in the first place. The first altruistic ant would have been at such a huge disadvantage compared to the rest of its group that it would never have got the chance to breed more altruistic ants. The same was true of humans—natural selection was intrinsically stacked against any altruistic individual surviving long enough to pass on their altruism.

This left a rather embarrassing paradox: The evolution of altruism was impossible, yet clearly altruism had evolved. If the biologists couldn’t resolve this, would they have to throw out the whole idea of natural selection?

Luckily, a young man called Bill Hamilton spared biology’s blushes with a slightly different solution in 1964. He proposed that altruism could have evolved within family groups—yes, an individual altruist would seem to be at a disadvantage, but that was not the whole picture because other individuals who shared the same genes associated with altruism would all influence each other’s “inclusive fitness.”

Discussions of human altruism are often framed in terms of someone drowning in a pond. Do you put your own life at risk to try and save them? If you do, that’s altruism. Hamilton’s idea, which became known as kin selection, acknowledged that compared to a selfish person who never got their feet wet, someone who went around jumping into ponds to save drowning people would be at a greater risk of dying before they managed to reproduce and pass their altruistic genes on to their children. However, if they happened to save a relative who shared the same genes, our altruist would have indirectly helped to get those genes passed on to the next generation after all. If the total benefit derived from having altruistic genes in the family, so to speak, was greater than the cost, then the evolution of altruism was no longer paradoxical."

"What struck researchers the most was that self-confidence,
sociability and leadership motivation all rose on average from the group
of men born in 1962 to those born in 1976. Striving, deliberation and
dutifulness crept up too, though not as much. Levels of intelligence or
family income didn’t seem to be driving these generational shifts, given
that they surfaced at all cognitive levels and social strata.

And
here’s the kicker: When the researchers compared personality scores
when the men entered the draft with earnings at age 30 to 34, they found
that even small upward shifts in personality ratings predicted a higher
income 10 years later—with the 1976 group earning as much as 12% more
than its 1962 counterpart, when other factors such as inflation, overall
wage rises and education were stripped away."

"The price of Brent crude, the international benchmark, is down 59%
since it hit a closing high of $115.06 a barrel three years ago on
Monday. West Texas Intermediate, the U.S. gauge, also is 59% lower than
the $107.26 high it hit a day later.

The steep fall sparked a
slump in oil company profits, recessions from Russia to Venezuela, and
huge job cuts across the world’s oil fields.

But now, petrostates, investors and major oil companies are adapting to a
world in which they see a range of $50 to $60 a barrel as the new
equilibrium. The industry has had little choice but to accept the new
reality after the Organization of the Petroleum Exporting Countries and
other big producers failed to lift oil prices by capping their
production, most recently at a meeting in late May."

"Shale producers operating in a number of fields can break even at $50 to $60 oil today"

"There are a handful of companies that have learned to make money on wells at $40 oil."

"U.S. shale drillers persevered by focusing on their best acreage and
making technological improvements, such as drilling supersize wells with
more sand to gain savings via economies of scale." (that is when companies expand the size of their operation and lower their average total cost because they spread high fixed costs over more units produced)

"Companies have driven down costs by squeezing suppliers and contractors,
trimmed less profitable projects and tackled a once spendthrift
culture."

"Employees who feel their work helps support their families are more
productive and energized about their jobs, even when they stand to gain
little for themselves."

"workers who reported the most energy and processed the largest number
coupons, despite disliking the work itself, were those who felt strong
commitment to family, which could include spouses, children, parents,
cousins or other kin. Those women processed about 10% more coupons a
week than employees who reported less family-driven motivation."

"“from an identity perspective, when employees perform well, they
reinforce their self-concepts as responsible breadwinners and good role
models.”"

"much of a person’s most intense commitment to their job can come from their desire to support their loved ones"

See also What really motivates us which argues that intrinsic motivation matters more than money. But I always wonder about that. Does that mean we don't need to pay doctors high salaries to get people to go to medical school?

Also, economists assume that people want to maximize their utility. Sometimes people are said to have inter-dependent utility functions. That is, the happiness of someone else affects your own utility. So if making more money on a job, even a boring one, if it is money you can spend on your family, it will cause you to work harder since you will enjoy the things you can buy for your family.

Wednesday, June 21, 2017

Eugene Robinson says that cutting taxes never works. But there is plenty of evidence to the contrary.

After tax cuts in Kansas, “Growth rates lagged behind those in neighboring states and the nation as a whole,” wrote Robinson.

But Kansas is just one state, and this was over only a brief period
(the tax cuts were enacted in 2012). Let’s look at some other evidence
Robinson did not include.

A 2009 paper co-authored by Harvard economics professor Andrei Shleifer
found effective corporate tax rates “have a large adverse impact on
aggregate investment, FDI (foreign direct investment), and
entrepreneurial activity,” and “a 10 percentage point increase in the
1st year effective corporate tax rate reduces the aggregate investment
to GDP ratio by about 2 percentage (points) and the official entry rate
(of new businesses) by 1.4 percentage points.”

Chris Edwards of the Cato Institute
recently reported that Canada has a 15 percent corporate tax rate, down
from 38 percent in the 1980s. Yet revenue from corporate taxes are now a
higher percentage of GDP. Something similar happened in the United
Kingdom.

Michael Barone of the Wall Street Journal
reported in January that between 2010 and 2016, “Fully 40 percent of
the nation’s population growth occurred in the nine states with no
income taxes” (these states only make up 21 percent of the total U.S.
population). And this “was fueled largely by net domestic migration.”

In the Wall Street Journal last December, Edward Lazear, Stanford professor and former chair of the President’s Council of Economic Advisers,
wrote that when it comes to per-capita gross domestic product, “There
is no other G7 country that comes close to the U.S. Most are about 70
percent as rich on a per-capita basis.” One of the reasons is the U.S.
remains a low-tax country compared with other G-7 countries. “The OECD
(Organization for Economic Cooperation and Development) reports that
the ratio of total taxes to GDP is just over 25 percent in the U.S.”

In an online article by economist James Gwartney, Nobel Prize-winning economist Edward Prescott
found “differences in tax rates between France and the United States
explained nearly all of the 30 percent shortfall of labor inputs in
France compared with the United States.”

Gwartney also reports the tax cuts of the 1920s and 1960s sparked
strong economic growth and the 1981 tax cut led to more revenue
collected from those in the upper tax brackets.

Brian Riedl in the National Review recently reported the economy
expanded 36 percent from 1982-89 after the Reagan tax cuts, far above
the 16 percent over the seven years since the end of the recession under
President Barack Obama.

Never used by tax-cut advocates or supply-side economists, the term
“trickle down” was simply used to ridicule the tax cutters and may go
back to Will Rogers’ criticism of Herbert Hoover during the Great Depression. The funny thing is that a large tax increase was passed in 1931, and during the 1932 election, Franklin Roosevelt attacked Hoover as a big spender.

Getting back to Kansas, the Wall Street Journal reported that
although its economy did not perform as expected after the tax cuts,
that is partly due to weakness in agriculture and energy, two important
sectors of its economy. And its unemployment rate is 3.7 percent, below
the national average. Hardly a nightmare, as Robinson calls it.

Tuesday, June 20, 2017

Article by Chris Baecker. It was printed in The San Antonio Express-News about a month ago. He manages fixed assets for Pioneer Energy Services and is an adjunct lecturer at Northwest Vista College (San Antonio College, where I teach is part of the same school system). Very interesting article with alot of food for thought. Excerpts:

"The U.S. has a progressive income tax structure, with seven rates
ranging from 10 percent to 39.6 percent. The more you earn in wages and
salary, the greater the percentage you pay in taxes.

As a result, one-fifth of American households pay roughly two-thirds
of federal income taxes. We’re already in “disproportionate” territory.
Logic dictates, therefore, that those who pay more would experience a
greater absolute “benefit” from an “across-the-board” cut in income
taxes.

Moreover, the concept of “across-the-board” income tax cuts is itself
erroneous when almost half of all Americans pay no net income tax.
Either they have no taxable income, or it’s canceled out by all the
deductions, exemptions, credits and other loopholes."

"“Tax cuts pay for themselves.”

Indulging the notion for argument’s sake, it’s hard to tell for sure whether tax cuts “pay for themselves.” The Congressional Budget Office
doesn’t even try, preferring the use of static scoring to predict the
effects; a tax cut of $1 necessarily means a loss of revenue for Uncle
Sam of $1.

However, it’s safe to say that most of us do not take increased
disposable income and simply stuff it under the mattress. By virtue of
that fact alone, it contributes to increased economic activity.

Many of us go shopping. My uncle stuffed most all his career raises
into savings, which banks typically turn around and lend to those who
have an immediate use for it.

And then there are folks like a couple friends of mine.

In the last couple years, they have either expanded an existing
business or opened other businesses. That requires buying new capital
equipment, wiring a new building for electricity, water, etc., and
hiring new staff, some of whom will pay income taxes."

"“Taxes are the price we pay to live in a civilized society.”

Supreme Court Justice Oliver Wendell Holmes Jr. coined that phrase
in a 1927 court case about business insurance premiums. Before it was
bandied about as a rationalization for the size of our government,
“civilized society” had a simpler meaning: to protect the private
property that fosters widespread prosperity; to provide police forces
and a court system to settle disputes; and to carry out other government
services.

Is it really “civilized” for someone to commandeer the earnings of
her neighbor to pay for her pet project? The person coerced is really
paying for the requisitioner’s haughtiness and lack of initiative."

Cartels seek to raise price by having all of its members cut output. By acting as one company, a monopoly, they actually increase profits for all members. But there are incentives for members to cheat and try to sell more oil than their quota. This drives down the price. But producers who are not part of the cartel, like U.S. companies have more of an incentive to produce oil, which then drives the price back down.

"OPEC is running smack into a wall of crude-oil storage.

The
global oil glut is proving immune to the limits set by the Organization
of the Petroleum Exporting Countries and its big-producer allies like
Russia, fueling the idea that output caps withholding almost 2% of world
crude supply were a miscalculation.

Both Brent, the
international benchmark, and West Texas Intermediate, the U.S. price
setter, fell almost 4% to their lowest levels of 2017 on Wednesday after
the release of fresh data about inventories. Overall, prices are down
over 17% since the beginning of the year.

In the U.S., the Energy Information Administration said Wednesday
that crude stockpiles fell last week by 1.7 million barrels, less than
the 2.6 million drop forecast by a Wall Street Journal survey. At the
same time, gasoline inventories rose by 2.1 million barrels, compared
with the survey’s expectation of a 700,000 decline, underlining worries
about the oversupply extending to crude oil’s products.

Oil
stockpiles in the Organization for Economic Cooperation and
Development—a club of 35 countries with industrialized economies—rose by
18.6 million barrels in April and were higher than they were when OPEC
agreed to its cut late last year, said the International Energy Agency, a
Paris-based group that advises governments on energy trends.

“There’s still so much crude in storage," said Doug King, chief
investment officer at RCMA Asset Management and manager of that firm’s
$200 million Merchant Commodity hedge fund. “OPEC needs much deeper cuts
to draw inventory.”

Adding to oil traders’ angst: U.S. oil production has come roaring back
to life. The IEA said U.S. crude supply will grow almost 5% on average
this year, and nearly 8% in 2018, potentially vaulting American
producers ahead of Saudi Arabia in daily output."

About OPEC's cuts

"Bjarne Schieldrop, chief commodities analyst at SEB Markets, the Nordic bank, said “It would stimulate production in the U.S. too much and this is basically what we are seeing."

"Eugen Weinberg, an oil analyst at Commerzbank, said OPEC needed to end its production cut. “The only option that OPEC has for the next five years is to let the market go”"

"OPEC representatives ...
pointed to a problem of rising production from Libya and Nigeria, which
were exempted from obligations."

"Daniel Yergin,
vice chairman of
IHS Markit
and a long-time oil market watcher, said OPEC wouldn’t abandon
its production-cut agreement, which took almost a year to put together
through 2016.

“When OPEC and the other producers agreed to this deal, they hoped that,
as the old adage says, time heals all—and time will heal the inventory
problem,” Mr. Yergin said. “They should now take a deep breath and
realize this will take a lot more time.”"

"OPEC ...
blamed U.S. shale for slowing its rebalancing efforts."

"In 2018, non-OPEC production is set to increase by 1.5 million barrels a day"

Click here to see historical gas prices. They fluctuate quite a bit, showing that OPEC cannot always maintain its hold on the market. (that only goes up through 2015. Gas prices went down almost 13% in 2016 compared to 2015, adjusted for inflation and so far this year they are up about 8% over last year).

The book The Economics of Public Issues by Roger LeRoy Miller, Daniel K. Benjamin and Douglass C. North has a chapter on cartels that discuss OPEC and why it cannot always meet its objectives. They point out the conditions necessary for cartels to work:

"CPS Energy is using behavioral science techniques, and some high-tech
data analysis, in a new program that taps on deeply rooted
psychological drives to reduce energy usage during peak times.

The pilot program will be rolled out to up to 100,000 customers this
summer and uses data culled from the company’s new smart meters to
influence consumer behavior. The strategy itself is relatively simple:
showing customers their energy consumption compared with their neighbors
and letting their competitive instincts do the rest.

“Plucking on their competitive spirit, you can get them to
reduce their energy use, anywhere between 1 and 3 percent over the
course of a year,” said Neel Gulhar, a senior director of product
strategy at Oracle Utilities. CPS has contracted with the company to run
the program.

Oracle Utilities draws on behavioral science techniques to motivate
the change. The most-used technique, according to Gulhar, is called
“normative comparison.”

“This is where you compare the energy use of a household to
households that are like them,” he said, later adding, “Time and time
again, we find that if you use these different behavioral science
techniques, you can actually change behavior.”

Competition is a deeply rooted instinct in human nature, a biological
trait that evolved along with the basic need for survival, social
psychologist Sander van der Linden at Cambridge University wrote in Psychology Today.

The program taps on that drive to win by sending out reports through
email that analyze a customer’s behavior and compare it with others in
the program. It’s “a little bit of a gamification thing,” said CPS Chief
Operating Officer Cris Eugster. The program wouldn’t have been possible
without more granular data from the utility’s new smart meters, which
transmit data remotely and eliminate the need for a meter reader to
record it each month, said Rick Luna, senior manager of product
development at CPS.

The goal is to persuade customers to reduce their use during
high-demand days, and the utility projects that it can save about 11
megawatts of energy usage, Luna said. One megawatt can power roughly 200
Texas homes during peak usage, according to the Electric Reliability
Council of Texas."

Wednesday, June 14, 2017

Economists assume that people are selfish. It seems reasonable to also assume that selfish people want to be happy and successful. So it could be in the interest of selfish people to be compassionate. This might be a variation on the invisible hand of Adam Smith, the idea that it leads self-interested people to act for the good of society.

Excerpt:

"The compassionate tend to have deeper connections with others and more friends. They are more forgiving and have a stronger sense of life purpose. Many studies have shown these results.
Compassion also has direct personal benefit. The compassionate tend to be happier, healthier, more self-confident, less self-critical, and more resilient."

The article also discusses compassion exercises that change your brain.

Below is a related post I did in January called "The Dalai Lama Says It Is Sometimes OK To Be Selfish."

"This is mostly a post from November, 2013. But there was another article
about something similar involving the Dalai Lama this week. So I have a
bit about that at the end of this post.

And of course, Adam Smith said when people act selfishly they are led, as if by an invisible hand, to make society better off.

So when might it be OK to be selfish according to his holiness? When caring for others.

Wait, how can that be selfish? Or is this some kind of Zen riddle like
what is the sound of one hand clapping? No, it's biology and evolution.
See Lending a hand does a body good by Jessica Belasco, from the San Antonio Express-News, 10-25-2013.

She talked to Dr. James R. Doty, a neurosurgeon at the Stanford
University School of Medicine and founder of Stanford's Center for
Compassion and Altruism Research and Education. Excerpts:

"Practicing compassion — recognizing someone else is suffering and
wanting to help relieve that suffering — just might be as important for
health as exercise or a healthful diet, some scientists believe.

Practicing compassion is associated with lengthened telomeres, the DNA
that protects the ends of your chromosomes and is a marker of longevity.

To understand why humans are hard-wired for compassion, Doty said, just
look at human evolution: Caring for others was essential to the survival
of the species. Humans developed powerful neuropathways associated with
nurturing and bonding with their offspring as motivation to care for
them in a hostile environment; otherwise their genes could not be passed
on. The same was true beyond the nuclear family when humans formed
hunter/gatherer tribes.

When we're responding to others' needs, though, we engage the
“parasympathetic nervous system,” relaxing us, Doty said. Stress
hormones decrease, and the immune system is boosted. In fact, that
occurs even if we just think about performing a good act for someone.

That's why intervening when someone needs help — whether in the form of a
hug, reassurance, financial help or something else — has a powerful
impact not just on the person being helped but on the helper.

Studies also have shown that volunteering, which is a way to practice
compassion, helps increase longevity — but with an important exception.
Study subjects who said they were volunteering to impress somebody or
for some other benefit, not because they authentically wanted to help
others, didn't enjoy the same benefit."

Adam Smith wrote a book called The Theory of Moral Sentiments.
One point he made there was that we are able to sympathize with other
people by trying imagine what they are going through (and I wonder if we
need to be good storytellers to be able to do that). Neuroeconomist
Paul Zak has been studying how the hormone oxytocin plays a role in
making us feel good when we have empathy for others (beware: Zak is a
big hugger). See an earlier post Adam Smith vs. Bart Simpson for more details.

There is an interesting book called Paleopoetics: The Evolution of the Preliterate Imagination. It relates storytelling to evolution.

"Christopher Collins introduces an exciting new field
of research traversing evolutionary biology, anthropology, archaeology,
cognitive psychology, linguistics, neuroscience, and literary study.
Paleopoetics maps the selective processes that originally shaped the
human genus millions of years ago and prepared the human brain to play,
imagine, empathize, and engage in fictive thought as mediated by
language. A manifestation of the "cognitive turn" in the humanities, Paleopoetics
calls for a broader, more integrated interpretation of the reading
experience, one that restores our connection to the ancient methods of
thought production still resonating within us.

Speaking
with authority on the scientific aspects of cognitive poetics, Collins
proposes reading literature using cognitive skills that predate language
and writing. These include the brain's capacity to perceive the visible
world, store its images, and retrieve them later to form simulated
mental events. Long before humans could share stories through speech,
they perceived, remembered, and imagined their own inner narratives.
Drawing on a wide range of evidence, Collins builds an evolutionary
bridge between humans' development of sensorimotor skills and their
achievement of linguistic cognition, bringing current scientific
perspective to such issues as the structure of narrative, the
distinction between metaphor and metonymy, the relation of rhetoric to
poetics, the relevance of performance theory to reading, the difference
between orality and writing, and the nature of play and imagination."

"Have you ever wondered why it matters that you care for other people?

It seems commonsense that this is a good way to live life. But there
are dominant philosophies today that suggest we need to maximize our own
individual self-interest.

This comes from economic theories of capitalism that suggest when
people look after their own self-interest, then society is better off.

The Dalai Lama explains why this doesn’t make sense in the beautiful
passage below. As he says, it’s an obvious fact that your own sense of
wellbeing can be provided through your relationships with others. So
it’s best to start cultivating practices of kindness and compassion."

Then the article has a long statement from the Dalai Lama on this
philosophy. But some economists might say that you can't run a
successful business if you don't care about others and try to learn
their wants and desires. Here is what Adam Smith said in The Wealth of
Nations

“It is not from the benevolence of the butcher, the brewer, or the baker
that we expect our dinner, but from their regard to their own
self-interest. We address ourselves not to their humanity but to their
self-love, and never talk to them of our own necessities, but of their
advantages”"

Tuesday, June 13, 2017

In my micro class, when I cover poverty, incomes and the income distribution, this is something that I mention when talking about incomes over time. Maybe they have not gone up as much as they used to because more of employee compensation has been going to benefits. The trend that Zumbrun discusses has been there before even 2006.

Excerpts:

"In 2006, just over 70% of employer costs went to wages and salaries. That’s now down to 68.3%, the lowest point in the data."

"In the first quarter of 2017, employers spent $24.10 an hour in wages and $11.18 in benefits for every hour of work.

The breakdown on those benefits: $2.91 for health insurance, $2.49 on
various types of paid leave (including vacation time, sick pay, holiday
pay and personal leave), $1.95 for Social Security and Medicare, and
$1.88 on other benefits (including unemployment and disability, life
insurance, workers’ compensation payments, and various types of
supplemental pay.)

Taking inflation into account, the gap in growth rates between wages
and benefits becomes starker. Real wages have grown just 4% in total
since 2006, according to this report’s measure. Real benefits have grown
12.4% over that period."

Monday, June 12, 2017

"A new paper in the Quarterly Journal of Economics (working version here)
finds that the combination of intelligence and a willingness to break
the rules as a youth is associated with a greater tendency to operate a
high-earning incorporated business as an adult i.e. be an entrepreneur.

Previous work examining entrepreneurship that categorizes all
self-employed persons as entrepreneurs has often found that
entrepreneurs earn less than similar salaried workers. But this
contradicts the important role entrepreneurs are presumed to play in
generating economic growth. As the authors of the new QJE paper remark:

“If the self-employed are a good proxy for risk-taking,
growth-creating entrepreneurs, it is puzzling that their human capital
traits are similar to those of salaried workers and that they earn
less.”

So instead of looking at the self-employed as one group, the authors
separate them into two groups: those who operate unincorporated
businesses and those who operate incorporated businesses. They argue
that incorporation is important for risk-taking entrepreneurs due to the
limited liability and separate legal identity it provides, and they
find that those who choose incorporation are more likely to engage in
tasks that require creativity, analytical flexibility and complex
interpersonal communications; all tasks that are closely identified with
the concept of entrepreneurship.

People who operate unincorporated businesses, on the other hand, are
more likely to engage in activities that require high levels of hand,
eye and foot coordination, such as landscaping or truck driving."

"On average incorporated business owners earn more, work
more hours, have more years of schooling and are more likely to be a
college graduate than both unincorporated business owners and salaried
workers based on two different data sets."

"people with high self-esteem, a strong sense of controlling one’s
future, high Armed Forces Qualifications Test scores (AFQT)—which is a
measure of intelligence and trainability—and a greater propensity for
engaging in illicit activity as a youth are more likely to be
incorporated self-employed.

Moreover, it’s the combination of intelligence and risk-taking that
turns a young person into a high-earning owner of an incorporated
business. As the authors state, “The mixture of high learning aptitude
and disruptive, “break-the-rules” behavior is tightly linked with
entrepreneurship.”

These findings fit nicely with some notable recent examples of entrepreneurship—Uber and Airbnb. Both companies are regularly sued for violating state and local ordinances, but this hasn’t stopped them from becoming popular providers of transportation and short-term housing.

If the founders of Uber and Airbnb always obtained approval before
operating the companies would be hindered by all sorts of special
interests, including taxi commissions, hotel industry groups and nosy neighbors.
Seeking everyone’s approval—including the government’s—before operating
likely would have meant never getting off the ground and the companies
know this. It’s interesting to see evidence that many other, less
well-known entrepreneurs share a similar willingness to violate the
rules if necessary in order to provide their goods and services to
customers."

Friday, June 09, 2017

This is a fairly long article, but we certainly hear alot about this. Bailey shows that jobs have changed quite a bit since the industrial revolution. Many were destroyed (that is, workers were replaced by machines), but many new jobs were created.

And before excerpts from the Bailey article, here is a link to
an article Paul Krugman wrote in Slate. He explains how, if the technology for making hot dogs improves, the laid off workers will get jobs making hot dog buns, since, if more hot dogs are being made, more buns will have to be made.

Now, excerpts from the Bailey article:

"The conventional wisdom among technologists is well-established: Robots
are going to eat our jobs. But economists tend to have a different
perspective.

Over the past two centuries, they point out, automation has brought us lots more
jobs—and higher living standards too. "Is this time different?" the
Massachusetts Institute of Technology economist David Autor said in a
lecture last year. "Of course this time is different; every time is
different. On numerous occasions in the last 200 years scholars and
activists have raised the alarm that we are running out of work and
making ourselves obsolete.…These predictions strike me as arrogant."

"We are neither headed toward a rise of the machine world nor a
utopia where no one works anymore," said Michael Jones, an economist at
the University of Cincinnati, last year. "Humans will still be necessary
in the economy of the future, even if we can't predict what we will be
doing." When the Boston University economist James Bessen analyzed
computerization and employment trends in the U.S. since 1980, his study
concluded that "computer use is associated with a small increase in
employment on average, not major job losses."

"The economist John Maynard Keynes warned in 1930 that the "means of
economising the use of labour [is] outrunning the pace at which we can
find new uses for labour," resulting in the "new disease" of
"technological unemployment." In 1961, Time warned: "Today's
new industries have comparatively few jobs for the unskilled or
semiskilled, just the class of workers whose jobs are being eliminated
by automation." A 1989 study by the International Metalworkers
Federation forecasted that within 30 years, as little as 2 percent of
the world's current labor force "will be needed to produce all the goods
necessary for total demand." That prediction has just two years left to
come true."

"In a 2011 television interview, President Barack Obama worried that
"a lot of businesses have learned to become much more efficient with a
lot fewer workers." To illustrate his point, Obama noted, "You see it
when you go to a bank and you use an ATM, you don't go to a bank
teller." But the number of bank tellers working in the U.S. has not gone
down. Since 1990, their ranks have increased from around 400,000 to
500,000, even as the number of ATMs rose from 100,000 to 425,000. In his
2016 study, Bessen explains that the ATMs "allowed banks to operate
branch offices at lower cost; this prompted them to open many more
branches, offsetting the erstwhile loss in teller jobs." Similarly, the
deployment of computerized document search and analysis technologies
hasn't prevented the number of paralegals from rising from around 85,000
in 1990 to 280,000 today. Bar code scanning is now ubiquitous in retail
stores and groceries, yet the number of cashiers has increased to 3.2
million today, up from just over 2 million in 1990, outpacing U.S.
population growth over the same period.

This illustrates why most economists are not particularly worried
about the notion of widespread technological unemployment. When
businesses automate to boost productivity, they can cut their prices,
thus increasing the demand for their products, which in turn requires
more workers. Furthermore, the lower prices allow consumers to take the
money they save and spend it on other goods or services, and this
increased demand creates more jobs in those other industries. New
products and services create new markets and new demands, and the result
is more new jobs."

"Since the advent of the smartphone just 10 years ago, for example, an
"app economy" has emerged that "now supports an astounding 1.66 million
jobs in the United States," Progressive Policy Institute economist
Michael Mandel reports. According to the Entertainment Software
Association, more than 220,000 jobs now depend on the game software
industry. The IBISWorld consultancy estimates that 227,000 people work
in web design, while the Biotechnology Innovation Organization says that
U.S. bioscience companies employ 1.66 million people. Robert Cohen, a
senior fellow at the Economic Strategy Institute, projects that business
spending on cloud services will generate nearly $3 trillion more in
gross domestic product and 8 million new jobs from 2015 to 2025."

""Electrification transformed businesses, the overall economy, social
institutions, and individual lives to an astonishing degree—and it did
so in ways that were overwhelmingly positive," Martin Ford writes in his
book Rise of the Robots. But why doesn't Martin mourn all the
jobs that electrification destroyed? What about the ice men? The
launderers? The household help replaced by vacuum cleaners and
dishwashers? The firewood providers? The candle makers?

To ask is to answer. Electricity may have killed a lot of jobs, but on balance it meant many more."

"The number of U.S. job openings hit a new high in April while hiring
slowed, a sign that employers are struggling to find workers.

The
number of job openings rose by 259,000 to 6.04 million, the Labor
Department said Tuesday, the highest level recorded since the government
started tracking the figure at the end of 2000. The number of hires,
meanwhile, fell by 253,000 to 5.05 million in April.

“The sharp
rise in openings while hirings fell provides some indication that labor
markets have tightened so much as to suggest we may be facing a shortage
of qualified workers,” said Raymond Stone, an economist at Stone &
McCarthy Research Associates, in a note to clients."

"The U.S. economy has been advancing at a historically slow but broadly
steady pace through the current expansion, spurring a long stretch of
hiring. Now, some economists are surmising that the ranks of Americans
who are unemployed or out of the workforce may not have the skill set
employers are demanding of their employees."

"“I think the skills mismatch between what workers have and what
employers are demanding might be weighing on the labor market,” said
Michael Pugliese, an economic analyst at Wells Fargo."

"Amazon already owns the high-income shopper segment in
the U.S. Now it’s making a bid to court those who have less income at
their disposal.

On Tuesday, Amazon announced that it is offering a 45
percent discount on Prime memberships — $5.99 a month instead of $10.99
month — to U.S. residents receiving government assistance.

Shoppers with an Electronic Benefits Transfer card — used
for benefits like the Women, Infants, and Children Nutrition Program —
are eligible for the lower price but they also have to re-qualify every year for up to four years.

The move comes a little over a year after Amazon first
introduced the $10.99 monthly payment option for Prime, which was
previously only available for an annual fee of $99.

The monthly option comes with the same perks like free
two-day shipping on tens of millions of items and access to a large
selection of online movies and TV shows for no extra charge."

Charging different prices to different groups of customers based on their ability and willingness to pay (a
discount) is price discrimination.

Why price discrimination raises profits

1. If a firm can get a higher price from some customers than others they increase their profits.
2.
If a firm can lower the price for others who might not have bought the
product to begin with, they also increase their profits.

Necessary Conditions for Price Discrimination

1.
The firm must face a downward sloping demand. Monopolies do but firms
in perfect competition do not (their demand, also their MR line, is
flat).

2. The firm must be able to readily (and cheaply) identify
buyers or groups of buyers with predictably different elasticities of
demand (senior citizens have a more elastic demand and will shop around
more since they have more time so restaurants might give them a
discount). The more elastic the demand, the greater the change in quantity demanded for a given change in price.

3. The firm must be able to prevent resale of the
product or service. If a student can buy a movie ticket for $6 while
everyone else pays $8, the firm will lose money if the students turn
around and sell their tickets for $7. So the theater can prevent resale
by checking student IDs to make sure people holding the lower price
ticket really are students.

#2 might be the key here for Amazon. The lower income customers will be spending a bigger share of their budgets on Amazon products and services. One of the determinants of elasticity is how much of your budget you spend on the item. As this goes up, your demand becomes more elastic (that is, quantity will change more for a given change in price). You are affected alot more by a change in the price of cars than a change in the price of donuts. So if the price of cars doubles, the quantity demanded will fall much more than if the price of donuts doubles.

And when firms can price discriminate, as explained above, they will charge lower prices (offer discounts) to those groups with higher elasticities. The number of substitute goods and the amount of time consumes have to adjust to price changes also affect elasticity.

"The cost of college attendance is rising while the financial benefits of a degree are falling."

"From 2000 to 2016, the tuition-and-fees component of the Consumer Price Index rose
3.54% annually (74.5% over the entire period), adjusting for overall
inflation. With sluggish business investment, a slowdown in income
growth has aggravated the rising burden of paying for higher education.
American families have taken on more than $1.3 trillion in student-loan debt—more than what they borrow with credit cards or to buy cars."

"the earnings advantage associated with a bachelor’s degree compared with
a high school diploma is no longer growing like it once did. Census
data show that the average annual earnings differential
between high school and four-year college graduates rose sharply, to
$32,900 in 2000 (expressed in 2015 dollars) from $19,776 in 1975—only to
fall to $29,867 by 2015."

"about 40% of recent college graduates are “underemployed,” often for a long time."

"recent attendees of Stanford University earn on average far more than
twice as much as those attending Northern Kentucky University ($86,000
vs. $36,000). Electrical engineers typically earn twice as much as
psychology majors."

"In recent years, male college graduates’ earning power has decreased
significantly, as it has for whites and Asians. Not so for women,
Hispanics and blacks, for whom the financial payoff to a college
education has continued to rise. College graduates traditionally earn
more than high school graduates in part because their degrees act as
signaling devices in the job market."

"As the proportion of adult Americans with college degrees grows beyond
one-third, being a college graduate no longer necessarily denotes
exceptional vocational promise. The bachelor’s degree is not the
reliable signaling device it once was."

Monday, June 05, 2017

"From 2011 to 2014,
the percentage of Zimbabweans scrambling to make a living in the
informal economy shot up to an astonishing 95 percent of the work force
from 84 percent, according to the government. And of that small number
of salaried workers, about half are employed by the government,
including patronage beneficiaries with few real duties."

"An acute cash shortage persists despite the introduction of a surrogate
currency in November. The government, unable to pay its workers their
Christmas bonuses, has offered them land instead."

"As long lines keep forming outside banks, the continuing decline of the
formal economy has raised fears of a repeat of the 2008 hyperinflation
crisis, which was fueled by the unrestrained printing of the old
Zimbabwean dollar, including a $100 trillion note."

"The government has occasionally cracked down — sometimes violently — on
the street vendors, who are not licensed, describing their activities,
near the seat of government and businesses, as an eyesore."

"According to an unspoken rule, the street vendors are allowed to operate
only after dark on weekdays and starting in late afternoon on weekends."

"Zimbabwe’s per capita gross national income peaked with independence in 1980, when Mr. Mugabe seized power, and bottomed out with the hyperinflation crisis of 2008."

"Mr. Mugabe’s violent seizure of white-owned farms starting in 2000
precipitated a decline in manufacturing and a process of
deindustrialization. Manufacturing peaked in 1992, accounting for about
30 percent of the gross domestic product. Now it is 11 percent and declining."

"With manufacturing’s sharp decline, as well as the resulting drop in
exports and spike in imports, Zimbabwe suffers from a steep trade
imbalance. That imbalance’s effect on the economy is exacerbated by the
American dollar, which Zimbabwe adopted in 2009 to combat
hyperinflation."

"Zimbabwe has experienced a crippling shortage of dollars since last March. Efforts to encourage the use of plastic money —
and the introduction, so far, of nearly $100 million into the market of
a surrogate currency called bond notes — have helped, though not
enough. Customers still stand for hours in long lines outside banks to
try to withdraw the few dollars available.

With the government now strictly controlling the transfer of dollars
outside Zimbabwe, companies dependent on trade are finding it
increasingly difficult to import critical goods."

"At a small auto parts shop in central Harare, called Track Board, Prince
Mapira, 23, said American dollars had vanished from the marketplace.
Customers now pay only in bond notes, which are recognized only inside
Zimbabwe, creating a problem for his business."

"The
auto shop needs American dollars to import parts from South Africa or
Japan. So Mr. Mapira takes the bond notes, which are supposed to be the
equivalent of the American dollar, to exchange on the black market.

“If you go there with 100 dollars in bond notes, they give you $70 or $80,” he said. “It’s not equal on the black market.”"

Friday, June 02, 2017

One weakness of the unemployment rate is that if people drop out of the
labor force they cannot be counted as an unemployed person and the
unemployment rate goes down. They are no longer actively seeking work
and it might be because they are discouraged workers. The lower
unemployment rate can be misleading in this case. People dropping out of
the labor force might indicate a weak labor market.

We could look at the employment to population ratio instead, since that
includes those not in the labor force. But that includes
everyone over 16 and that means that senior citizens are in the group
but many of them have retired. The more that retire, the lower this
ratio would be and that might be misleading. It would not necessarily
mean the labor market is weak.

But we have this ratio for people age 25-54 (which also eliminates college age people who might not be looking for work)

Here is a good graph from the St. Louis Fed. It shows that there are about 125 million people in the 25-54 year old group. So since we are 1.3 percentage points below the 79.7% of December 2007, that is still 1.6 million fewer jobs (Hat tip: Vance Ginn of the Texas Public Policy Foundation).

Here is the timeline graph of the percentage of 25-54 year olds employed
since 2007.